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Myth No. 1: 2012 Technology Always Saves Money

Welcome back. The year end Myth Buster summarized how well we did for the year. With the new year, we are off and running with new myths.

The first vagary for 2012 concerns the automatic response that technology saves money. Sometimes, this myth is served up as technology saving labor, time, etc. Of course, technology represents a critical feature of business. It is responsible for the outstanding productivity of American agriculture, for example, which continually produces more with fewer workers. Similar patterns appear in other industries. However, in the interests of myth busting, let’s be honest: technology does not always save money.

The first argument to make our case concerns the sheer cost of a technology upgrade. “Upgrade” can refer to the retooling of a manufacturing plant, for example. From experience, this often takes place when a new plant is built. It may also be the case when an older plant is remodeled. Honda (HMC) is just finishing a new manufacturing plant in Mississippi that cost $1.3 Billion. Toyota (TM) has also opened a new plant in the Magnolia State. Each company could have bought an existing plant somewhere else – Detroit or Delaware were possibilities. Of course, an older plant requires massive retooling to make it productive. However, savvy observers will note that the real reason for these new plants is the location: Mississippi is quite favorable to auto manufacturers who – let’s say to be diplomatic – do not embrace the United Auto Workers. Hence, despite the benefits of retooling, the savings in Mississippi derives more from hourly pay rates than the technology itself.

The more common meaning of “upgrade” refers to the installation of a new operating system. When Microsoft (MSFT) launches a new version of Windows, many organizations automatically adopt the latest technology. As a policy, Information Technology companies cut off support for the older technology after a suitable period. When Vista came out a few years ago, Microsoft decided to end support for its predecessor, XP, by 2014. This pretty well forces companies to move to the new alternative. As one might expect, Microsoft’s stock price and profit rose significantly after the release of Vista.

But, is each new rollout of an operating system really superior to the last version? And, is the new version worth the cost? Microsoft’s millions of customers did not embrace Vista as fully as Microsoft hoped. Users complained that Vista performed more slowly than XP. A year after its release, only 13 percent of businesses had signed on.

Operating systems, software and hardware stand out as technology expense items. Even so, experienced managers know that this is the tip of the iceberg. Consider the amount of training and general downtime when any new technology system comes on line. This ranges from actual installation time to “hand-holding” -- as many Information Technology professionals call the time needed to show people how to use the latest technology.

Data migration may also be involved even with a seemingly harmless move to a new operating system [OS]. The author was once involved in a major transition to a new software system that involved all departments in the organization. The president, who approved the changeover, was from the old school. He walked around with sharpened pencils and graph paper and had a personal computer on his desk that served as a paperweight, while the rest of us worked weekends to reach the target date.

The costs should not be hidden to good financial managers. A study on the true cost of technology in education found a series of expensive problems including, a) lack of technical expertise on the part of teachers and administrators, b) no sustained funding, c) difficulties in managing technology. Part of the issue is that the “cost” of technology in public reports and press releases rests on the purchase price of the hardware. The cost of software, upgrades and training are also significant.

Let’s not forget the frequent technology snafus. Lack of data security, for example, during the transformation phase offers a troubling example. A Gartner Group (IT) survey ranked worms and viruses as the most worrisome security threat, outranking hacking, identity theft and spyware. The annual cost of viruses and their repair falls in the billions also. So, technology saves money in the long term, but in the short term, well…

Please send suggestions for more myth busting efforts. Let’s agree there are more myths forming out there.

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Michael McTague, Ph.D. is Senior Vice President at Able Global Partners, a financial consulting firm in New York City.

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